Construction work continues on the main stadium for the 2012 Olympic games in London Photograph: Sang Tan/AP

The government today revealed it would have to raid its London 2012 contingency fund for £461m to pay for the ongoing construction of the athletes village and the international media centre, after private sector investment dried up.

The Olympics minister, Tessa Jowell, also announced that the media centre – due to form a major part of the legacy from the games – would not be downgraded to a temporary building. But she admitted it would have to be entirely funded from the public purse.

Ministers and 2012 organisers had prepared the ground for today's decision by revealing that private-sector interest in the £1bn Olympic village and media centre had all but evaporated. The developer Lend Lease was to build 3,000 flats that would be sold on after the games, but those plans were hit by the collapse of the property market.

Despite reducing the number of flats by around 1,000, the developer has been struggling to find any takers, requiring the government to sanction the use of £326m from the fund to keep work going while talks continue.

The Olympic Delivery Authority will continue discussions with Lend Lease and with banks in the hope of reaching an agreement by March. There will also be an increased affordable housing element, with a third of the flats now set to be allocated for that purpose.

The media centre, which will now cost £355m after some savings were identified, will be funded entirely by taxpayers and sold on after the games. The option of making the facilities, which will house 20,000 journalists and technical staff during the Olympics and Paralympics, into a temporary structure or splitting them over two sites had been discussed.

The centre is intended to act as the catalyst for the regeneration of the area, providing office space for up 13,000 employees in the media and technology sectors. It had been variously talked of as a potential home for a major media organisation or a digital hub that would house a range of hi-tech businesses.

Following today's meeting of the Ministerial 2012 Funders Group, chaired by the chancellor, Alistair Darling, it was announced that a total of £461m, including £95m previously earmarked by Jowell, would be required to fund ongoing construction. Almost a quarter of the £2bn contingency has now been allocated.

Today's confirmation that the media centre would remain on the Olympic park after the games was welcomed by local campaigners but criticised by opposition MPs who said it risked leaving a "great bull of a white elephant".

Jules Pipe, the mayor of Hackney, said the news was a "big step forward". He added: "The media centres represent the single most significant opportunity for an economic legacy for east London from the games."

Jowell tried to put a gloss on the news by saying that the decision safeguarded the future of two of the 2012 projects considered most significant in legacy terms and would result in a bigger return for the taxpayer once they were sold after the games.

But there remains scepticism in some quarters about whether tenants can be found to occupy the mammoth office space, equivalent in size to Canary Wharf's Canada Tower, at a time when many media and technology companies are laying off staff.

"They must shoot their great bull of a white elephant. The legacy plans aren't there to justify an all-singing, all-dancing media centre. There is no evidence that, after the games, Tessa Jowell's pipedream of a 'digital hub' could survive without substantial ongoing public investment," said the Liberal Democrat Olympics spokesman, Tom Brake. "It is time to cut the Olympic cloth and settle for a scaled-down media centre."